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History of Bubbles

On March 10th of 2000 the NASDAQ reached an all time high of 5,132.52 [47] and a bear market bottom of 1,108.49 on October 10, 2002 [48] representing a 78% decline from the peak of the technology market two and one half years prior. To the best of our knowledge there were no government programs to cushion the fall or borrow sales from the future as is the case in the current real estate market. No organization purchased inflated shares of tech companies to protect the investor class. As of this writing the NASDAQ has been on quite a tear closing at 2,522.95 on April 26, 2010 [75].which remains less than one-half or 49% of its all time high month to month ten years later.

 The DOW Jones Industrial Average crested at 14,164.00 on October 9, 2007. A 78% decline in the DOW from the all time high would equal 3,116.08. The DOW tested 6,500 in February of 2009 and some experts believe we need to retest and even set new lows prior to establishing any sustained upward trend or signal a long term bull market. The scary part is that talented commentators like Dennis Neal of CNBC and a plethora of authors are stating we will exceed 12,000 this year and even set a new high eclipsing 14,000 in short order. It was less than two years ago when some market wonk was referencing a future DOW of 36,000. Where is that deadbeat now?

If for illustrative purposes the housing decline approximates that of the NASDAQ, once the government subsidies dissipate, then the house that Darcy bought would bottom at $132,000.00 and will eventually recover to be worth $276,000 in ten years. An additional advantage of owning stocks over housing is that once the price tanks, it’s over unless the investor is required to fund a margin call. The homeowner pays a monthly amount plus taxes, insurance, utilities and maintenance for the privilege of living in a tomb the evisceration of wealth the final outcome for the sake of maintaining good credit or other instilled moral pretenses.               


Darcy Spears v. the Bank

If we divide the amount of Darcy’s loan of $600,000 by her monthly payment of $2,864.49  the outstanding time to pay off the note equals approx. 210 months or 17 years though in this illustration she owns a thirty {30} year note. If Darcy Spears is only able to carry the house for another three years or {36} months and then is forced for reasons relating to loss of job, cash flow problems, further restrictions on credit or otherwise to default then the bank would have received an additional $103,121.64 of loan payments in addition to the $206,208.00 she already paid since 2004 assuming she didn’t pop the cherry and take a second mortgage before the banking industry red lined all of Clark County from writing additional home equity loans.

 Remember in our analysis we assumed every possible advantage in this transaction to favor Darcy Spears, from no cash down, thirty year note, reducing the monthly outlay and an artificially low and fixed rate of interest. No ARMS here! So if Darcy sucks it up for 36 more payments and then capitulates, the bank will have recovered $309,329.64 in payments and in the worst of all cases sells the home for approx $132,000.00 recovering $441,329.00 against the original note of $600,000.00;  in a world where banks buy money for free, limiting their loss to 26.4% or the interest rate they charge some of their credit card clients.

The point remains that if home prices continue to decline and if Darcy Spears remains faithful to her loan covenant the banks improving financial situation is directly proportional to the rise in the misery index of Darcy Spears assuming all other things remain equal. The win/lose outcome represents a cruel but realistic homecoming of the new economy.

 The prosperity of the bank in this situation is predicated on the demise of their client and the longer the client homeowner holds prior to folding the better for the bank and more degrading for the client homeowner.

Since people tend to remain inert unless forced to change by pending disaster and many banks will recover their total note if they are willing to write off the interest and apply all payments against the outstanding balance and since the government is subsidizing the financial institutions with as much FREE money as they can spend; what’s not to like. If inflation takes root then the situation would reverse and Darcy Spears would be a champ paying off a fixed debt with currency worth less or {worthless} as her home made of concrete, wood, precious metals, paint, drywall and building supplies escalates in value.

 Since inflation other than money supply variations is usually caused by labor shortages pressuring wages up and/or to few goods chasing to many consumers and  if our analysis is wrong  and instead of deflation we hit a pocket of hyper inflation the currency is sufficiently depreciated {destroyed} for motives known only to our fearless leaders seeking to re-inflate the economy to prevent a depression or for purposes of shaving 20% to 50% off the national debt leaving everyone without hard money of gold, silver, other commodities, or something to barter besides their good looks like cigarettes or homemade booze going broke we can return to the good old days of the great westerns where women in flowing dresses, shawls and blue bonnets  paid for things with little string drawn velvet pouches hidden in their cleavage and men slam five dollar gold pieces down on the bar to curry favor and purchase a hard night of drinking for friends and foes alike.

 Finally if Darcy paid for this property with cash then her losses are limited to the final selling price of the home less what she paid plus upkeep, taxes and insurance.

Look at the bright side at least Darcy Spears home wasn’t built with Chinese Drywall which would require a gutting of the house; probably unnecessary but lawyers need to be paid and the larger the legal ego and more incompetent the judge the grander the payout!

Since President Obama is skipping the legal system entirely and simply extorting or shaking down British Petroleum for a cool $20b with no offset to prevent the tsunami of litigants seeking jackpot justice maybe he will host a similar twenty minute {20} meeting with the Chinese and ask them for an appropriate amount to resolve these nasty product liability claims including toxic paint on jewelry and kids toys, some of our beloved dogs and cats dying after consuming food and now drywall allegations all imported from an overheated Chinese economy.

 The President can really light up the Chinese, like their insane fireworks displays, which we religiously purchased for years by the truck load from Phantom Fireworks in Pahrump, Nevada.

Maybe he can shake them down in a private parlor during dinner all while looking elegant in his Tuxedo at the upcoming and coveted State visit the invitation extended by President Obama and accepted by the Chinese during the G20 meeting in Toronto.

The new installment of the Godfather has finally arrived.

Aaron Christensen the high powered lawyer in Las Vegas once told my wife that I should “ get out of bed”  earlier in order to make the meeting like the one to which she was engrossed! With the new Obama way of streamlining the legal process; the president could if he wishes have one of his trusted servants like Kenneth Feinberg the compensation czar wire the appropriated monies to various trial lawyers of their ilk around the country, they can then shop for affected disaster Gulf Oil clients, take their 40% cut and pay out the balance to legitimate claimants as long as they’re unionized democrats and voted for Obama all without the lawyers ever getting out of bed. Brilliant! Unconstitutional but Brilliant!  Aaron Christensen you were on to something there of almost prophetic insight.


 Short Selling: Forget about it!

In a foreclosure, a bank typically ends up taking the property after the homeowner fails to make series of consecutive payments on their mortgage. A short sale happens when sellers owe more than the house is worth, and the lender is willing to accept less than the mortgage balance to get out of the investment [37].

Depending on the type of loan, the government can consider the forgiven debt as income and tax it. In California, most first mortgages to buy a home aren't affected, but homeowners can face big tax bills if they default on some types of refinance loans and second mortgages that let them cash out equity. [38] Legislation to remedy this situation remained in limbo at the time of this writing as Governor Arnold Schwarzenegger threatened to veto a bill containing “the fix” as part of a much larger Mexican standoff by and between the Governor and the Democratic controlled California House and California Senate.

Unfortunately as State governments face the prospects of ever large gaping holes in their budgets and unable to muster the intestinal fortitude necessary to confront and slash the legacy costs of their retired labor force and re-negotiate their union contracts they will continue to seek other “fixes” or gimmicks like taxing the loss of the short sale as income and if  you reside in any state including ones on the verge of insolvency like California, Nevada or New York the bank still retains the right to hunt you down years later and collect the difference. If you are willing to emulate smart and/or rich people who strategically default on their loans and believe that cash is king, credit scores don’t matter and are willing to walk away from the $500.00 open line on your last credit card then a strategic default may just the thing for you.


What the pros do when their portfolio tips over?

Tisman Speyer Properties and BlackRock purchased The Stuyvesant Town and Peter Cooper Village Apartments in Manhattan, New York at the height of the real estate market in 2006 for $5.4b. The giant complex of 110 buildings and 11,000 apartments is where almost 25,000 residents call home; It remains the largest residential real estate deal in United States history. “The record purchase price seemed outrageous to many real estate analysts.” [19] The prevailing concept to capitalize on their investment was to convert rent controlled apartments of middle-class tenants into luxury units. However the process proceeded much more slowly than planned, tenants protested, a state court ruled that $200 million in rent increases was improper, and the Manhattan real estate market dropped precipitously rendering their $5.4b investment now worth something just north of $2b. Ouch!

Their main advantage over the local homeowner is that they lost other people’s money instead of their own. They couldn’t or wouldn’t make a $16m loan payment and chose not to file for bankruptcy which was a very smart move, handed the keys back to the creditors who now own the property while the speculators and partners skip down the street and appear as wizards finance for appearances on CNBC with Maria Bartiromo the “Money Honey”  who looks more often than not to us as if she is lit while performing her interview duties including  slobbering all over her guest like the crew at Blackrock who claim $3.3Trillion of assets under management.

To Bartiromo they appear as icons of free market capitalism but it’s easy to be Blackrock and retain your gigantic paper asset claim when you simply flush bad debt in the form of other people’s money down the toilet. Debt destruction! Now that’s what we’re talking about! It’s the only way we will ever heal as a nation.

President Obama invalidated centuries of established law when he zeroed out the General Motors bondholders for his union cronies; the very same people whose labor, health care and legacy costs bankrupted their employer.

Bondholders of planet earth beware that 3% return will take you 33 years just to recover your principal! You’ve had two {2} tells in the last two years and more to come with the imminent financial purge of California.

 We recall the words of Shedini, adored by Jonathan McCallum a fellow magician and or illusionists fooling no one anymore, who once informed us of her price to model for our Las Vegas show girl and art gallery promotion. “I’m down with that” [20]

The losers in the aforementioned real estate transaction were Calpers or the California Public Employment Retirement Systems. They lost $500M. The California State Teachers Retirement System lost $100M [66].

 BlackRock faced no moral consequences for the catastrophic failure of this deal and the subsequent magical disappearance of over $600 million of cash assets from the joint retirement accounts of people who dedicated their lives to teaching us English, History, Math and how to boycott Arizona; and how about the management of Calpers and CSTRS who have since revised their investment strategy to not engage in predatory funding of projects designed to displace thousands of persons from their modest rent controlled homes in New York, but only because it blew up in their face.

 We are not advocating rent control but were there any adults in the room when this investment scheme was hatched? Did anyone anywhere with skin in this game think for a single moment that in the most litigious society on the face of the planet in the history of time that a lawsuit would not be filed and that some judge would inevitably split the baby down the middle effectively wiping out your best made plans for high end condo development with damage payments too?.. at the same moment that New York originally named New Amsterdam and the real estate market like the Dutch tulip bulb bubble burst!

Of course the CYA spin out of CalPERS is hilarious: “CalPERS wants to balance a socially responsible investment philosophy with the need to ensure adequate long-term returns for its pensioners. The intent is to prevent us from investing in those strategies that are not well intended and had tenant impacts that were unacceptable to staff," Laurie Weir, CalPERS' real estate portfolio manager, told the board. "We really are trying to prevent those tenant impacts that we have seen over the past year."[67]

Translation: We lost lots of other peoples money primarily our pensioners and we were smoked like a big fat Mendocino “psychosis inducing” diesel. [68] We retained no moral compunction about rendering rent controlled tenants homeless even though our investment requirement for positive returns was directly proportional to the misery and suffering endured by those poor souls attempting to eek out a life in Stuyvesant Town and Cooper Village Apartments in Manhattan, New York.

Maybe CalPERS can ask Black Rock to make them whole since they {BlackRock} failed to perform due diligence prior to this purchase.

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Life after Money

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 March 10 , 2000 Bull Market

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